Income Tax Issues for Real Estate Developers
There different income tax implications for real estate development depending on the phase of development. We will evaluate the implications for the pre-construction period, construction period and post-construction period.
Income Tax Issues for Real Estate Developers | Simkover and Associates Chartered Accountants
For purposes of discussing real estate development, we often refer to "soft costs", which means costs only indirectly associated with the development of the real estate. Examples are feasibility studies, surveying costs, legal fees, and office and management fees. During the pre-construction period, most of the soft costs that may be incurred are tax-deductible costs, except for interest and property taxes. There are actually three types of costs that pertain to the pre-construction period: Capital, current and inventory costs. Capital costs are not tax-deductible except gradually over a period of years, and only on the portion that pertains to depreciable property. Current costs are fully deductible in the year they are incurred. Inventory costs are a current asset, and only get written off at time of sale. When purchasing land, the developer will classify the cost of the land as inventory if the intention is to re-sell the land. The inventory cost will also include land transfer taxes, registration fees and brokerage and legal costs that relate to the purchase of the land.
During the construction period, the soft costs referred to above are no longer tax-deductible, but rather are added to the cost of the building. If an existing building is being renovated, the renovation costs are not tax-deductible as routine repairs and maintenance costs would be.
As soon as construction has been completed, the soft costs again become tax-deductible. On the closing date for sale of a real estate project, the developer often becomes liable for various future costs, such as completion of roads, landscaping or purchase of appliances in the case of a condo development. These costs are tax-deductible to the developer at the time the costs are incurred.
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